COC for Houston or Austin Rentals

16 Replies

Looking to gain my first rental property in 2018, but rentals seemed to be heavily compressed. I'm interested in opinions on what type of cash-on-cash ROI is a realistic target in the Texas (Houston & Austin) markets. Insights?

In Austin you are typically looking anywhere from 10 to 17% realistically.

10 to 17% COC in Austin? I'd love to know where you're finding those deals!

@Kris Wong I have a friend group doing 20% deals... But they are not the norm! Buying distressed (often mailers), rehabbing, and they're in areas where they can do creative things in terms of renting to get a premium.

To your point... I can't imagine how most people are covering their mortgage on rentals. Buying MLS in Austin - say $500k, and renting out for under $2k... Not a 10% - 17% city.
Even outside of Austin - Cedar Park and Round Rock avg rent is $1,200. Avg Home Price in Cedar Park is $300k. 

Definitely not 10%, but obviously it can be done.

$300K in Cedar Park gets you closer to $2000 than $1200. $500K gets you closer to $3000-$4000 in rent. Yes, not the 1% rule but in Austin, with 30 years of steady appreciation, your ROI will outpace most 1% properties elsewhere. That being said, I do like to put my investors either in multi-family or brand new homes around $225,000 pulling in $1700 in rent. That may not sound great in some cities but the likelihood of the $225K becoming $300K in 3 to 5 years keeps people investing here.

Dan Burstain, Real Estate Agent in TX (#616078)
512-588-3260

@Joshua Longcor I can't speak for Austin but in Houston, we consistently purchase rentals in the 20-35% COC return range. We have also completed numerous deals where we didn't have any money in the property after refinancing (BRRRR strategy).

I would be wary of buying negative cashflow in the hopes of appreciation. It's not our business and I wouldn't recommend it for someone who's just starting out. 

A side note: there are wholesalers pushing a lot of deals that don't make sense or have single digit COC return. Always error on the side of caution until you get a few deals under your belt.

Best of luck!

@Cameron Tope . From your experience, do you find the better ROIs inner loop or further out in the suburbs? Also would agree with your point of not buying negative cashflow. 

There are a lot of factors that go into COC ROI in the Austin market. If you are looking at conventional financing with 20-25% down, the market looks very different than if you are buying distressed properties cash and doing the BRRRR method and getting all if not more of your money out in 6 months to a year. If you are new to REI and dont have the cash or the incentive to buy distressed properties needing major rehab, you will be lucky to find positive cash flowing properties in the heart of Austin.

Just this year I entered the market and purchased 3 duplexes in Austin suburbs and used conventional financing. I am seeing between 5-7% COC. Personally I am happy with these properties as there is a value add through raising rents to closer to market value, shift utilities to tenants, and general improvements as the units turn over, which will then allow 10-15% rent increases given similar units in good condition in the area. Although Austin has historically seen market leading appreciation rates, I am not banking on that, but will be a nice bonus.

This is a long term investment strategy for me, but everyone has their own drivers. Know what works for you. Don't compare yourself to others. Sure 12%-17% COC is possible, but how they got that may be a different strategy than yours. Know your numbers and what works for you. If 10% COC is what you are looking for, find it. But don't compromise on your numbers.  

Originally posted by @Dan Burstain :

$300K in Cedar Park gets you closer to $2000 than $1200. $500K gets you closer to $3000-$4000 in rent. Yes, not the 1% rule but in Austin, with 30 years of steady appreciation, your ROI will outpace most 1% properties elsewhere. That being said, I do like to put my investors either in multi-family or brand new homes around $225,000 pulling in $1700 in rent. That may not sound great in some cities but the likelihood of the $225K becoming $300K in 3 to 5 years keeps people investing here.

@Dan Burstain what type of cap rate could one expect from the brand new homes for 225K pulling in $1700 in rent?

@Dan Burstain Please show me an active listing for $500k, and then I'll pull up HotPads or something for a similar listing in the same area to see if anything is going for $3k - $4k a month in rent.

Either I've been renting places for 25% - 50% of market value (although finding online), or the big houses I'm renting downtown must be worth less than $500k. 

But honestly, maybe I'm looking in the wrong area. So I'd love to be pointed in the right direction. Please feel free to share some ~$500k listings with me you think would have $4k/mo cashflow. I'd love to be in those areas.

@Kevin Yi  

The cap rate on a brand new home of say $225,000 pulling in around $1700 in rent would be around 5%. A low cap rate to what you might prefer but that would get you a great ROI when you consider the consistent and steady appreciation Austin has seen the past 30 years. Plus most of these newer places are fairly turnkey with no worries to major repairs for a decade or longer.

@Drew Macomber

Drew, it all depends on location.  If you look downtown, you can buy a luxury condo for $500,000 that only pulls in $2000 rent.  But if you look for a house in in say Great Hills or Rough Hollow, for $500,000 you will see rents as high as $4000 for that house.  For example, in Rough Hollow, 519 Baldovino Skwy sold for $469K a few months ago and 4 days later was leased for $3600/mo.  There are lots of examples like that.  You just have to look in the right areas.  Happy to help.

Dan Burstain, Real Estate Agent in TX (#616078)
512-588-3260

@Dan Burstain can you send me links to these properties?

@Dan Burstain So, a luxury condo for $500k renting for $2k (which is 2.4% COC ROI), is not close to $4k (as mentioned earlier). That is literally negative cashflow with most conventional loans.

I agree appreciation is what draws people here, no doubt. I'm just not seeing the same numbers.

Outside of the city of Austin, I've no idea. The example closest to a $500k investment bringing in $4k is technically in Lakeway, not Austin. So it's a little apples to oranges. The idea behind Austin being #1 in the ULI for investors, is that city's booming density is bringing insane density... Which is not the same selling point as Lakeway.

Maybe relevant to @Kevin Yi 's question... I know of a huge 4 bedroom home on the east side that was listed at $2,000/mo for rent, and it sat there for months. I was the first to make an offer to rent it. 

I'm not saying it can't be done, because I know of many 20%+ COC examples. But I don't want people to be misled to think you can come in Austin and buy a place downtown for $500k and get $4,000 a month, and experience the appreciation. That's just not happening. Yes, outside of Austin the cashflow is a little better... but the appreciation will come from density.

Hey @Drew Macomber ,

Can't help you if you are trying to see good COC in downtown Austin. I think you are missing out if you think Rough Hollow, Great Hills, Lakeway etc are not Austin. These places are within 30 min of downtown. They have Austin addresses. They are Austin. Hell, Hutto will soon be part of Austin. You are not fitting 4 million people in a few downtown condos. Density is happening all over. Yes, central Austin (Downtown) is super dense but you will see appreciation was equal to or greater in some of these areas I mentioned as it was downtown.

Dan Burstain, Real Estate Agent in TX (#616078)
512-588-3260
Originally posted by @Bryan Petrinec :

There are a lot of factors that go into COC ROI in the Austin market. If you are looking at conventional financing with 20-25% down, the market looks very different than if you are buying distressed properties cash and doing the BRRRR method and getting all if not more of your money out in 6 months to a year. If you are new to REI and dont have the cash or the incentive to buy distressed properties needing major rehab, you will be lucky to find positive cash flowing properties in the heart of Austin.

Just this year I entered the market and purchased 3 duplexes in Austin suburbs and used conventional financing. I am seeing between 5-7% COC. Personally I am happy with these properties as there is a value add through raising rents to closer to market value, shift utilities to tenants, and general improvements as the units turn over, which will then allow 10-15% rent increases given similar units in good condition in the area. Although Austin has historically seen market leading appreciation rates, I am not banking on that, but will be a nice bonus.

This is a long term investment strategy for me, but everyone has their own drivers. Know what works for you. Don't compare yourself to others. Sure 12%-17% COC is possible, but how they got that may be a different strategy than yours. Know your numbers and what works for you. If 10% COC is what you are looking for, find it. But don't compromise on your numbers.  

I couldn't have said it better! @joshua longcur One of your biggest challenges will be setting your criteria to fit your goals. I would start out relatively lax then get more strict as you gain experience. Also, don't be afraid to change your goals and subsequently the types of deals your purchasing. 

Originally posted by @Joshua Longcor :

@Cameron Tope. From your experience, do you find the better ROIs inner loop or further out in the suburbs? Also would agree with your point of not buying negative cashflow. 

We own everything outside the loop. Inner loop would be more for appreciation while the suburbs have more opportunities for cash flow. 

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